Resource Allocation Method

How do we determine who pays the cost of a sales tax?

-The division of the tax between buyers and sellers depends on the elasticities of demand and supply. -To see how, we look at two extreme cases. Perfectly inelastic demand: Buyers pay the entire tax. Perfectly elastic demand: Sellers pay the entire tax.

Budget Line

-The limit to a household's consumption choices. It marks the boundary between those combinations of goodsand services that a household can afford to buy and those that it cannot afford.

Price Floor

-a regulation that makes it illegal to trade at a price lower than a specified level. -When a price floor is applied to labor markets, it is called a minimum wage. -causes unemployment when set above equilibrium

Subsidies

-is a payment made by the government to a producer. -marginal social benefit equals the market price, which has fallen. -marginal social cost has increased and exceeds marginal social benefit.

Personal Characteristics

allocate resources to those with the "right" characteristics. For example, people choose marriage partners on the basis of personal characteristics. But this method gets used in unacceptable ways: allocating the best jobs to white males and discriminating against minorities and women.

Lottery

allocate resources to those with the winning number, who draw the lucky cards, or who come up lucky on some other gaming system. State lotteries and casinos reallocate millions of dollars worth of goods and services each year. But lotteries are more widespread. For example, they are used to allocate landing slots at some airports. Lotteries work well when there is no effective way to distinguish among potential users of a scarce resource.

Command

allocates resources by the order (command) of someone in authority. For example, if you have a job, most likely someone tells you what to do. Your labor time is allocated to specific tasks by command. A command system works well in organizations with clear lines of authority but badly in an entire economy.

Majority Rule

allocates resources in the way the majority of voters choose. Some societies use majority rule for some of their biggest decisions. For example, tax rates that allocate resources between private and public use and tax dollars between competing uses such as defense and health care. Majority rule works well when the decision affects lots of people and self-interest must be suppressed to use resources efficiently.

Contest

allocates resources to a winner (or group of winners). The most obvious contests are sporting events but they occur in other arenas: For example, The Oscars are a type of contest. A contest works well when the efforts of the "players" are hard to monitor and reward directly.

First Come First Serve

allocates resources to those who are first in line. Casual restaurants use first-come, first served to allocate tables. Supermarkets also uses first-come, first-served at checkout. First-come, first-served works best when scarce resources can serve just one person at a time in a sequence.

Producer Surplus

is the excess of the amount received from the sale of a good over the cost of producing it. We calculate it as the price received for a good minus the minimum-supply price (marginal cost), summed over the quantity sold.

Marginal Cost

is the minimum price that a firm is willing to accept.

Consumer Surplus

the excess of the benefit received from a good over the amount paid for it. We can calculate consumer surplus as the marginal benefit (or value) of a good minus its price, summed over the quantity bought.

Market Demand Curve

the horizontal sum of the individual demand curves.

Market Supply Curve

the horizontal sum of the individual supply curves.

Force

war has played an enormous role historically in allocating resources. Theft, taking property of others without their consent, also plays a large role. But force provides an effective way of allocating resources—for the state to transfer wealth from the rich to the poor and establish the legal framework in which voluntary exchange can take place in markets.

Price Ceiling

-is a regulation that makes it illegal to charge a price higher than a specified level. Called rent ceiling when talking about the house market -A rent ceiling set below the equilibrium rent leads to an inefficient underproduction of housing services. -Does not benefit the poor

Black Market

-is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed. -A shortage of housing creates a black market in housing

Production Quota

-is an upper limit to the quantity of a good that may be produced during a specified period. -marginal social benefit equals the market price, which has increased. -marginal social cost has decreased. -Production is inefficient and producers have an incentive to cheat.

Marginal Utility

-is the change in total utility that results from a unit-increase in the quantity of the good consumed.

Total Utility

-the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility.

Allocative Efficiency

A situation in which goods and services are produced at the lowest possible cost and in quantities that provide the greatest possible benefit

Resource Allocation Methods

Market price Command Majority rule Contest First-come, first-served Lottery Personal characteristics Force

Marginal Social benefit

The marginal benefit enjoyed by society-by the consumer of a good or service plus the marginal benefit enjoyed by others.

Marginal Social Cost

The marginal cost incurred by the producer and by everyone else on whom the cost falls-by society. It is the sum of marginal private cost and marginal external cost

Diminishing Marginal Utility

The tendancy for marginal utility to decrease as the quantity consumed of a good increases.

Marginal Benefit

The value of one more unit of a good or service. A demand curve is a marginal benefit curve

Market Price

When a market allocates a scarce resource, the people who get the resource are those who are willing to pay the market price. Most of the scarce resources that you supply get allocated by market price. You sell your labor services in a market, and you buy most of what you consume in markets.